China in Africa: The Real Story

The framework for China Development Bank's offer of a $3 billion line of credit was approved last week by Ghana's parliament. The controversial credit was debated over several sessions of parliament, and the opposition abstained from the final vote. Finance minister Duffuor said the credit is "comparatively cheaper than floating a Eurobond" and from what I can see, the line of credit is roughly equal to, or potentially better than, a non-concessional World Bank IBRD loan, although clearly not better than the World Bank's IDA credits.

What's interesting about all this? Three things: (1) Ghana's democracy and lively parliament show that a better governed country allows more transparency about its engagement with Chinese banks; (2) Because of that transparency, we are learning a lot from Ghana about how Chinese banks engage, and they don't seem to have prohibited Ghana from releasing this information; (3) China's resource-secured line of credit model appears alive and well. The IMF and World Bank are not going to like this challenge to their position as preferred creditors.

The terms of the CDB line of credit differ in its two installments. The first tranche of $1.5 billion will have a 20yr maturity including a 5yr grace period. The interest rate will be 6 month LIBOR (London Inter-Bank Offered Rate) plus a margin of 2.95%, with a commitment fee of 1% and an upfront fee of 0.25%. The terms of the second $1.5bn tranche are 15yr maturity including a 5yr grace period, interest rate of 6 month LIBOR plus a margin of 2.28%, and probably the same fees.

The credit appears to be secured by a petroleum off-take arrangement and escrow account, the same model China has been using for decades in Africa, most famously in Angola. As one report states:

Repayment of the loan facility ... would be effected from petroleum revenue and other government owned resources. Due to the aforementioned terms of repayment, the report stated that a commercial contract for the off-take of oil would be entered into by the Ghana Petroleum Corporation and the Chinese authorities. According to the report, the government would reduce the impact of commercial projects on the public debt, through an on-lending and escrow arrangement for most of the projects under the facility.

With a debt burdened past, Ghanians rightly worry about the increasing levels of debt being incurred by their government. Their parliament needs now to ensure that all the projects financed under these credits have proper feasibility studies, and that the contracts they finance are won through open, international, competitive tenders. There should be plenty of Chinese companies competitive enough to win contracts that these loans will finance, and according to the terms, up to 40% can finance non-Chinese contractors.

Under clause three of the Master Facility Agreement, a minimum of 60 per cent of each tranche was required to be paid to the People's Republic of China (PRC) contractors, a clause which allows about 40 percent of the facility to be applied towards local content sourcing, or sources other than the PR

Ghanians are already trading accusations about corruption and worries about kickbacks. With infrastructure contracts this is a very real worry. But from what I've seen the intial allegations stem from a lack of understanding of the convention of upfront fees. Some believed the fees serve as a commission of some kind to some broker or deal maker, but this kind of fee is common, even in World Bank loans, which also have upfront fees. The World Bank's IDA loans for the poorest countries currently have no commitment fee (this is a change) but do carry a service fee of 0.75%. The World Bank's IBRD loans (for middle income countries, probably Ghana falls here now) vary in fees. The highest are for special development policy loans, currently at 6 month LIBOR plus a minimum of 2%, with upfront fees of 1% of the total loan amount, while "Development Policy Loans with a Deferred Drawdown Option (DPL DDO) carry a 0.75% front-end fee, plus a 0.50% renewal fee; and Catastrophe Risk or Cat DDOs carry a 0.50% front-end fee, plus a 0.25% renewal fee".

A hat tip to Naa Aku Addo for the story. Below, more details of the loan, repayment, and the projects that are projected to be financed.

...The goal of the credit facility, according to movers of the motion, is to enhance the efficiency and effectiveness of the oil and gas sector operations, as well as industrial minerals processing and agro industrial ventures.

The MFA, the report noted, would be disbursed under individual subsidiary project agreements (Subsidiary Agreement) to be signed between implementing agencies, and the contractors, for the construction and establishment of projects to be financed from the facility.
Actual disbursement of the funds would be for projects, for which the Subsidiary Agreement had been approved by the Government of Ghana, through Parliament, and the China Development Bank (CDB).

Projects under Tranche A1 of the loan agreement include the Western Corridor Renewal Project with railway components, Western Corridor Infrastructure Renewal Project, Takoradi Port Phase 1 Retrofit Rehabilitation, and the Sekondi Free Zone Project, which include the development of onsite infrastructure and utility services for the proposed industrial minerals processing estate and alumina refinery.

Benefits to be derived from the projects, according to the Joint Committee on Finance and Poverty Reduction Strategy, include added value within a relatively short time to the nation's gas resources, by developing it to its fullest, to the benefit of the country.

Repayment of the loan facility, according to the report, would be effected from petroleum revenue and other government owned resources. Due to the aforementioned terms of repayment, the reported stated that a commercial contract for the off-take of oil would be entered into by the Ghana Petroleum Corporation and the Chinese authorities.

According to the report, the government would reduce the impact of commercial projects on the public debt, through an on-lending and escrow arrangement for most of the projects under the facility.

Fifteen percent (15%) of the Government of Ghana's (GoG) counterpart funding would be paid from the 'Owner Contribution Account,' to be established as a sub-account under a main 'Collection Account' to be established at the Bank of Ghana, into which the GoG would deposit funds towards the repayment of the loan facility.

The committee's report further stated that the government intended to repay the loan facility through the Annual Budget Funding Amount (ABFA) with the Petroleum Revenue Managing Act, 2011.

Under clause three of the Master Facility Agreement, a minimum of 60 per cent of each tranche was required to be paid to the People's Republic of China (PRC) contractors, a clause which allows about 40 percent of the facility to be applied towards local content sourcing, or sources other than the PRC.

Prior to the approval of the loan facility, the Minority had argued that though the intent of the facility was good, inconsistencies, coupled with contradictions in the whole agreement, ought to be corrected before going ahead to source the US$3 billion Chinese loan.
Whilst the Majority members were of the opinion that the projects earmarked for funding under the facility were critical to the nation's development, especially, the gas infrastructure development, and that approval must be given to enable the various Subsidiary Agreements to be negotiated and presented to the House for approval, those on the Minority side argued that since the definition of 'Facility Agreement' includes Subsidiary Agreements, approval of the Facility Agreement would necessarily imply the approval of the Subsidiary Agreements, which are not yet known.